Advisers at large wire houses and smaller broker-dealers will be the wealth management players hit the hardest by regulatory reform.
Those in between in size are likely winners, said Doug Dannemiller, senior analyst at Aite Group. This group includes large independent broker-dealers such as Edward Jones, Raymond James and LPL Financial, which can compete against the big wire houses.
For the biggest and smallest, the cost of regulatory changes will be a burden. Bank of America Corp. said during its second-quarter earnings call that the components of regulatory reform dealing with overdraft, the CARD Act and the Durbin amendment are expected to take a $4 billion bite out of B of A's revenue.
"We are still looking at ways to help mitigate the costs, recognizing that we can't mitigate all of it," B of A spokesman Jerry Dubrowski said. "We have not been specific about how to do that as of yet."
Jeff Spears, chief executive of Sanctuary Wealth Services in San Francisco, said he sees only two ways of offsetting costs: "by lowering the compensation of the adviser and raising the fees of the clients."
"There's going to be a lot of dislocation to make up for the $4 billion shortfall at B of A. And that will hold true for Wells Fargo and Citigroup and JPMorgan as well," Spears said.
Dubrowski said it's too early to speculate about what B of A's options will be. "But I would disagree with the suggestion that the only way to offset revenue reductions is to decrease adviser compensation. We have not discussed that at all in our plans."
Meanwhile, the 2,000 or so smaller broker-dealers may struggle to keep up with the increased costs of regulatory change, Dannemiller said.
Advisers unhappy with cutbacks at the wire-house firms will move to some of the larger broker-dealers in the independent channel, where they can do a better job of servicing their clients, Spears said. "In the next three to five years there will be more assets under management in the indie channel than in the wire-house and global management channel," he said.
At the end of 2009 the wire-house channel had roughly $4 trillion of assets under management, Spears said. In the independent channel the amount was $800 billion to $1 trillion. "The only way you get there is by doubling or tripling the growth rate of the indie channel," Spears said. "And the growth rate in the wire-house channel will have to be negative."
A negative growth rate in the wire-house channel is not as far-fetched as it may seem. In the independent channel, many of the wealth managers are already registered as investment advisers, so the changes wrought by the financial reform bill will be minimal; most have already migrated toward a fee-for-service model and are fiduciaries, said Geoffrey Bobroff of Bobroff Consulting in East Greenwich, R.I.
But the impact on the wire-house community of moving to a fee-for-service model would be significant.
Wells Fargo and a number of other companies are already moving brokers to a fee-for-service model, which means brokers get paid less up-front and more over time. The regulatory reform bill will just accelerate the migration, Bobroff said.
"Meanwhile, financial intermediaries such as Fidelity and Schwab will migrate away and join the indie channel, thereby shifting growth to that channel," Bobroff said. "Clearly the wire-house community prides itself on its wealth management oversight, so I don't think they'll give up easily. It will be a battle."
